Nutshell: Doing the right thing: understanding business ethics

Understanding business ethics helps us to contribute to cultures where doing the right thing becomes the norm.

These days, the idea of doing business ethically is never far from the media gaze. Not for us the age of the 'great men' of the boardroom doing whatever they wanted however they wanted.

We live instead in the age of corporate social responsibility (CSR) and environmental, social and governance (ESG) investing; of strict corporate governance codes and practice; of Black Lives Matter and #MeToo protests; of moves towards a wider stakeholder capitalism. How we operate at work, how we make social purpose a reality, how we avoid the corporate scandals of the past have become something of an industry in its own right.

Increasingly, we expect our organisations – and their people - to apply ethical and moral beliefs and values to how they behave, make decisions and do business sustainably.

Despite all of this awareness and effort, we don’t have to dig too deeply to know that organisations today are far from the paragons of virtue we might like to believe. Whether it’s Volkswagen cheating on emissions testing, Meta harvesting the data of its users without consent; sexual harassment allegations at any number of organisations, or individuals such as Bernie Madoff and his (in)famous Ponzi scheme, scandal and fast practice remain a staple of the world of work.

It might seem reasonable to conclude that we’ve not really moved on from the 1970s, when economist Milton Friedman argued that the only social responsibility of business “is to maximize its profits” – and everything else can go hang.

But whether we believe that ongoing scandals are the work of a few wrong'uns or more systemic, there’s no doubt that the bar for how people behave at work has been raised in recent years. There is a growing appreciation that business ethics do matter and that business has a role to play in wider society beyond Friedman-like maximisation of profits. And we’ve seen a greater willingness to call out behaviour that’s seen as unacceptable, whether that’s at a corporate or individual level.

As leaders, we need to understand what business ethics is, why it matters and what we can do to create as ethical an environment as possible for ourselves, our people and our organisations.

What is business ethics?

The word 'ethics' is a shorthand for the moral principles or standards that govern our behaviours and actions, a set of values that help us to define right from wrong.

According to the UK’s Institute of Business Ethics (IBE), business (or corporate) ethics is:

“…the application of ethical values to business behaviour. Business ethics is relevant both to the conduct of individuals and to the conduct of the organisation as a whole. It applies to any and all aspects of business conduct, from boardroom strategies and how companies treat their employees and suppliers to sales techniques and accounting practices.”

Some ethical requirements for businesses are codified in law. Environmental regulations relating to pollution, minimum wage requirements and restrictions against insider dealing or anti-competitive behaviour are all examples of legally-mandated minimum standards.

But that still leaves plenty of room for manoeuvre for the potentially corrupt. Business ethics enhances the law by outlining acceptable behaviours beyond government control. It touches on a range of areas from outright fraud and manipulation to sustainability, accounting practice, diversity and inclusion, and exploitation. It affects how we conduct ourselves and make decisions at work.

American philosopher and business ethicist, Robert C Solomon, summarised the scope of business ethics with his three Cs:

1. The need for compliance with the rules, including laws, principles of morality and community customs and expectations.

2. The contribution business can make to society through the value and quality of products or services.

3. Being aware of the consequences of business activity: internal and external, intended and unintended.

Why business ethics matters

It’s hard to identify a direct correlation between ethical behaviour and organisational performance, but it’s not unreasonable to assume that behaving ethically has positive benefits.

The IBE business ethics framework (more about this below) summarises some key business benefits of running our organisations ethically and sustainably:

• Enhanced trust and reputation

   

• Improved employee engagement, talent recruitment and retention

   

• Better, more consistent decision-making

   

• Early warning when things go wrong

   

• Better risk management

It’s certainly clear that allegations of unethical behaviour can have negative, even disastrous consequences: public relations crises, reputational damage, operational distractions, financial liabilities, poor employee morale, even total collapse.

When stakeholders – whether individuals, groups or other organisations - enter into a relationship with an organisation, it’s not unreasonable for them to assume that that organisation will protect their interests. For example, a shareholder will expect a return on their investment and transparency about how the organisation operates; an employee will expect a fair rate of pay and safe working conditions. If these expectations are not met, relationships can become strained and the organisation damaged.

Where organisations model positive ethical behaviours, their people are much more likely to follow suit. A positive ethical profile also helps to attract and retain a wider range of people and improve job satisfaction and engagement, fertile ground for improved outcomes and growth.

Deloitte’s annual Gen Z and Millennial Survey tracks changing attitudes among today’s workforce. It shows that people are increasingly looking for an employer whose values match their own – whether that’s an expectation that companies will deliver on social and environmental change, take flexible working and employee wellbeing seriously or act on discrimination and harassment.

The IBE has similarly highlighted research that suggests that “62% of millennials want to work for a company that has a positive impact on the world, 53% would work harder if they felt they were making a difference to others and 50% would prefer purposeful work to a high salary”.

And it’s not just the people we work with. Investors, for example, are looking to the ESG profile of the organisations they support. And customers are also demanding high standards of ethical behaviour and voting with their feet if their expectations are not met.

Companies such as TOMS shoes have found a ready market among customers who share their clear sense of social purpose. TOMS gives away a pair of shoes for every pair it sells and distributes a third of its profits every year to promote “grassroots good”.

It’s a great example of Robert Solomon’s contribution writ large – although just charging a fair price for what we offer would also count.

As a counterpoint to Milton Friedman, Solomon makes clear that business success need not come at the expense of integrity. For Solomon, “good ethics is good business”: operating fairly and integrating ethics into operations are a necessary precondition to long-term success.

Towards a more ethical environment

So, if business ethics is not a contradiction in terms, how can we make that a reality on the ground?

Rules and policies

The minimum requirement for an ethical organisation is to have a mind to Solomon’s first C: compliance with rules and the law.

As we’ve seen, a common approach to corporate malpractice has been the proliferation of laws, rules and regulations that look to keep organisations on the straight and narrow. These might include:

• Anti-discrimination legislation, such as the UK’s 2010 Equality Act which makes it against the law to discriminate against people on the basis of nine “protected characteristics” – including race, gender, disability and sexual orientation.
  
  
• Whistleblowing laws that protect people’s right to speak out if they see something they believe is wrong in the workplace.
  
  
• Health and safety laws that look after our physical and mental wellbeing at work.
  
  
• Governance codes that outline rules and best practice for running organisations, often mandatory for larger, more complex companies.
  
  
• Charity law that makes it clear what registered charities can and can’t do in terms of, for example, their purpose and investments.
  
  
• Data protection legislation that governs how we use and share people’s personal data.
  
  
• Consumer rights legislation that protects the rights of consumers when they buy products and services from us.
  
  
• Fair competition rules that ensure organisations can trade on a level playing field and prohibit things such as price fixing or abusing a dominant market position.
  
  

Within organisations, this law and regulation is usually reinforced and supported by a range of policies and guidance that look to encourage people to behave in appropriate, ethical ways – Solomon’s community customs and expectations. Some of these – such as equal opportunities and health and safety policies or having clear and transparent grievance disciplinary policies – might be mandated by law. Others might include:

• Anti-bullying or harassment policies.

• Guidance for whistleblowers on the specific procedure to be followed.

• Data protection policies.

• Environmental policies.

• Equal pay policies.

The limits of regulation

It’s clear, though, that simply having all of this law and guidance, helpful as it is, cannot create more ethical workplaces on its own. It’s simply not possible to legislate for every eventuality, nor for the people who are prepared to bend and flout the law, or turn a blind eye for their own ends.

Author Margaret Heffernan’s book Wilful Blindness takes its name from the transcripts of the trial of Jeffrey Skilling and Ken Lay, architects of the one of best-known corporate scandals and meltdowns ever, at American energy giant Enron. The judge in the trial believed that the CEO and chairman should have known about the fraud and malpractice happening at the corporation, but they had “deliberately blinded” themselves to “just how rotten” their company was.

Heffernan’s paradox of blindness suggests that we may think that ignoring or not confronting something might make us safer, but, in reality, wilful blindness only makes us more vulnerable to risk. We make ourselves powerless when we choose not to know, as Skilling and Lay found to their cost.

The sheer range of legislation and regulation might also make us feel that we’ve got ethics covered. But box-ticking and governance statements in annual reports can give us a false sense of security, heightening rather than mitigating risk.

We may know what being ethical looks like. We may have in place the right frameworks, rules and policies. But all the regulation and legislation in the world won’t help if we’re not intentional about making ethics a priority, both as individuals and organisationally. We need to look instead at creating an ethical culture, one that focuses not just on what people do, but on how they behave and make decisions.

A business ethics framework

To help us embed ethics into our cultures and behaviours, the IBE has created a business ethics framework. It’s designed to bring together a combination of factors that make up an ethical culture in organisations.

While we all have a role to play in making and keeping our organisations ethical, leaders at all levels are crucial, setting the right tone and keeping ethics front of mind.

Building an ethical culture starts with a clear sense of purpose, communicated through our values. With these in place, we can create a framework in which our values can be built into our operations and people’s behaviours.

The IBE recommends that this can take the form of an ethics programme, a set of tools that help to translate values into practice. All of the elements of the programme help to create “a consistent ethical culture that is forged by the right tone from above, where people have confidence that the right decisions are being made and that they can speak up freely when they have a concern”.

Building an ethics programme

The elements of the IBE ethics programme are:

• An ethics risk assessment to identify key, relevant issues. For example, if we are a customer-facing organisation, are we delivering value for customers? Does our environmental profile stack up? What are the implications of a big gender pay gap?
  
  
• A code of ethics, described by IBE as a map, “offering guidance on what route to take when there is a choice to make”. This will need to be tailored to our particular needs; a financial services company, for example, might want to include explicit mention of compliance with relevant regulation. But most codes of ethics will include a statement of the organisation’s core values; the ethical standards – or rules of conduct – expected of their people, how the code will be monitored and implemented and guidance on how concerns can be reported.
  
  
• Training and communication to make sure people understand what’s expected of them and to engage with ethics.
  
  
• An infrastructure for sustaining standards; for example, processes for how concerns can be raised; ethical criteria in recruitment and appraisals, pay and incentives; policies relating to things such as discrimination, working with suppliers and conflicts of interest.
  
  
• Processes for monitoring the effectiveness of the programme, for benchmarking against other, similar organisations and for giving and receiving feedback, and sharing information about the impact of the ethics programme.

The aim is to create a culture where ethics is just part of “how we do things around here” and where everyone feels empowered to think critically, speak up, ask questions and think carefully about the implications of their actions.

Being virtuous

Another way to think about business ethics is to learn lessons from the world of classical philosophy and the field of virtue ethics.

Writing in Harvard Business Review, Peter Rea and his co-authors warn us of the dangers of relying too heavily on regulation and compliance when tackling unethical or damaging behaviour. Instead of focusing on the poor choices we want people to avoid, we might take a leaf out of Plato’s book and focus on the positive virtues we want them to learn and deploy.

When we do good, displaying virtues such as fairness, courage and wisdom, we reveal ourselves to be of excellent character. By developing our character, we provide ourselves with our own personal ethical framework that will help us to stay on track and do the right thing. And if organisations are full of people with character, organisation culture is likely to be more virtuous too.

Plato believed that we can all develop character, and that the underpinning virtues are best learnt through questions and discussions rather than through statements and proclamations: in effect, we learn ethics in conversation with others. So, by creating a common, virtues-based language at work, leaders can become “teachers of culture”, to lead by example.

Rea goes on to identify seven classical virtues we can use to build this language to create ethical cultures that go beyond mere compliance:

• Trust: confidence in one another.

• Compassion: an understanding of another’s challenges.

• Courage: strength in the face of adversity.

• Justice: a concern for fairness.

• Wisdom: having good, sound judgement.

• Temperance: having self-restraint.

• Hope: a positive, optimistic expectation of future events.

By encouraging people to live by these values, we create a framework that everyone can use when facing tricky ethical issues or moral dilemmas. When we’re faced with a tough decision – for example, testing our options against values such as compassion and fairness help us to make more ethical choices.

The more we practise, the more natural being virtuous will become. It will help us make the shift from asking ourselves “Is this legal?” to “Is this ethical?”. That inappropriate behaviour we’ve just witnessed might not fall foul of anti-discrimination law, but, if we want to contribute to a more ethical workplace, shouldn’t we have the moral courage to call it out anyway?

It’s an approach that aligns with Solomon’s thinking too. Good business has to be about more than just profit; a focus on virtues such as responsibility, community and integrity makes organisations more sustainable long term.

If that sounds a bit woolly or aspirational, he also reminds us that Aristotle believed that virtues are meaningless unless they are transformed into action. We need to keep ethics front and centre in everything we do at work. Values + action become virtues, and those virtues create the shared trust, co-operation and integrity that underpin all workplace relationships.

We may never entirely rid the world of corporate scandals, dodgy accounting or bad behaviour, but it’s incumbent on all of us, especially as leaders, to contribute to cultures where they’re less likely and a-typical – and can be routinely and successfully challenged. Understanding the field of business ethics and the impact of our behaviours and actions is an important starting point.

We can all become more virtuous as a result.

Test your understanding

• Outline Robert C Solomon’s three Cs of business ethics.

• Identify three benefits of an ethical organisation.

• Name three areas of law and regulation that support business ethics.

What does it mean for you?

• Find out if your organisation has an ethics policy. Reflect on how well the values and expectations it outlines are reflected on the ground. What more could you do to model the right behaviours and actions?

• Consider how a focus on the seven classical virtues might provide a useful ethical framework for you and your team.